Dozens of banks are in advanced talks with the European Central Bank about moving operations to the European mainland. As Brexit nears, many London-based financial institutions are considering Frankfurt, Paris or Dublin.
"Some have visited us several times to discuss their plans to move," said Daniele Nouy, who heads the ECB's banking supervision.
Updating eurozone finance ministers — currently meeting in Brussels — on the progress of discussions, Nouy said the banks wanted clarity on how they can retain access to the single market after Brexit. She said 20 financial services providers have already applied for a eurozone banking license.
Frankfurt benefits from Brexit
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No to shell branches?
But Nouy voiced her concern that international banks were overly relying on "empty shell" subsidiaries to continue working in the bloc following Brexit. She warned banks against setting up branches in the EU in name only, while keeping most of their operations in London.
Under EU law, financial institutions wanting to offer services such as deposits and lending are required to have an independent subsidiary based in an EU country.
If it fails to negotiate a new relationship with the rest of Europe when it departs the EU in 17 months from now, Britain will lose its passporting rights to provide financial services within the bloc.
Several banks have publicly indicated that they plan to move hundreds or thousands of London-based employees to Frankfurt, Paris and Dublin, among other EU-based locations, in preparation for the UK's departure.
Lucrative banking jobs to move
A number of Japanese lenders in particular and US investment bank Morgan Stanley have already confirmed their moves to the German financial capital. Others are waiting until early 2018 to see if a smoother Brexit can be agreed between Britain and the UK, after a multi-year transitional arrangement was mooted after negotiations looked likely to stall.
The potential exodus is not limited to financial services as some London-based law firms have also enquired about moving their headquarters to Dublin.
Management Consultants Oliver Wyman have estimated that as many as 75,000 banking and insurance jobs could leave Britain in case of a so-called hard Brexit, where no new trade deal with Europe is finalized. The firm has estimated that 10,000 positions would be relocated on the first day after Brexit.
It estimated that, in a worse-case scenario, British-based banks would lose 40-50 percent of total revenue from selling financial services to the EU.
Deal or no deal? Brexit options boiled down
There's a spectrum of options on Britain's future relationship with the EU, each with a distinct set of advantages and disadvantages. While euroskeptic purists favor a clean "hard Brexit," others favor a softer landing.
Image: picture-alliance/dpa/R.Vieira/W.Rothermel
Hard or soft options
It's essentially a choice of a harder or softer Brexit. Harder prioritizes border control over trade. UK firms would pay tariffs to do business in the EU, and vice versa. The softest Brexit would see access to the single market, or at least a customs union, maintained. That would require concessions — including the payment of a hefty "divorce bill" — to which the UK has provisionally agreed.
Image: picture-alliance/dpa/R.Vieira/W.Rothermel
A leap into the unknown
Businesses have expressed concern about a "cliff edge" scenario, where Britain leaves the EU with no deal. Even if an agreement is reached at the EU bloc level, the worry is that it could be rejected at the last minute. Each of the 27 remaining countries must ratify the arrangements, and any might reject them. That could mean chaos for businesses and individuals.
If there is no agreement at all, a fully sovereign UK would be free to strike new trade deals and need not make concessions on the rights of EU citizens living in the UK or pay the financial settlement of outstanding liabilities. However, trade would be crippled. UK citizens in other parts of the EU would be at the mercy of host governments. There would also be a hard EU-UK border in Ireland.
Image: Imago
Divorce-only deal
The EU and the UK could reach a deal on Britain's exiting the bloc without an agreement on future relations. This scenario would still be a very hard Brexit, but would at least demonstrate a degree of mutual understanding. Trade agreements would be conducted, on an interim basis, on World Trade Organization rules.
Image: Fotolia/Jens Klingebiel
Limited arrangement, like with Canada
Most trade tariffs on exported goods are lifted, except for "sensitive" food items like eggs and poultry. However, exporters would have to show their products are genuinely "made in Britain" so the UK does not become a "back door" for global goods to enter the EU. Services could be hit more. The City of London would lose access to the passporting system its lucrative financial business relies on.
Under the Swiss model, the UK would have single market access for goods and services while retaining most aspects of national sovereignty. Switzerland, unlike other members of the European Free Trade Area (EFTA), did not join the European Economic Area (EEA) and was not automatically obliged to adopt freedom of movement. Under a bilateral deal, it agreed to do so but is still dragging its feet.
Image: picture-alliance/Anka Agency International
The Norway way
As part of the European Economic Area, Norway has accepted freedom of movement – something that no Brexit-supporting UK government would be likely to do. Norway still has to obey many EU rules and is obliged to make a financial contribution to the bloc while having no voting rights. Some see this as the worst of both worlds.
Image: dapd
A Turkey-style customs union
Turkey is the only major country to have a customs union with the EU, as part of a bilateral agreement. Under such an arrangement, the UK would not be allowed to negotiate trade deals outside the EU, instead having the bloc negotiate on its behalf. Many Brexiteers would be unwilling to accept this. It would, however, help minimize disruption at ports and, crucially, at the Irish border.
